The Lighthouse Problem

March 29, 2006

One frequent criticism of the laissez-faire policy is that its often dogmatic arguments generally do not propose much of an alternative to perceived problems. Mises would attest to this, it’s not a very convincing argument to assert that “The market will solve the problem.” He of course was debating the Great Depression, with John Maynard Keynes. The task for laissez-faire-minded individuals, is then to propose manners in which the market might co-ordinate to do so.

In an interview with Reason, Nobel Laureate, Ronald Coase said, “My approach is to compare the alternatives. People like [Paul] Samuelson like to set up a perfect world and say that the market does not bring us to this point and imply that the government should do something. They stop their analysis at that point.” Which reminded me of a recent discussion I’d had - finger pointing doesn’t get you anywhere; if you don’t like an idea, or if you see a problem, it’s your responsibility to come up with alternative. Then we can debate the merits of each, and hopefully reach a solution.

Discussing the Lighthouse Problem, Coase says “Economists had always used this as a service that had to be provided by government. How could a private provider ever be paid for it? So without government operation you wouldn’t get lighthouses. My usual practice is to look into what actually happens, and if you look into what actually happens you discover that there’s a long period in which lighthouses were provided by private enterprise.”

It helps to know that the were previously operated in this manner, but I’m concerned with how lighthouses might be operated now. It’s not enough to just say “The market will solve it,” or “That’s the way it’s always been, that’s the way it’s gonn’ be.”

How might the Free Market solve the lighthouse problem?

Those who own vessels have an interest in not sinking them to the bottom of the sea. For this reason, they insure their capital assets. And they will be disinclined to dock in a city that cannot insure safe passage in the night, or in the fog. Port cities who are dependent on the trade and carriage over water have an interest in maintaining lighthouses - they may decide to tax citizens or businesses nominallly to support the lighthouse that sustains the city’s commerce. Now, I know this will draw the ire of my libertarian friends, so I’ll go a step further.

It seems that those involved in insuring freight would have a vested interest in providing for the safe passage of vessels over water - this ought to induce them to build the lighthouses, and charge it as part of the insurance premiums. Uninsured vessels - though they may benefit from the lighthouse, would not benefit from being uninsured. And there are myriad ways that a ship might sink. Insuring against the bundle of potentialities makes sense for most shipowners. And the market solves the problem by risk analysis and actuarial information.

Far from a be-all end-all solution, this is just one of many ways that thousands of interconnected, albeit independent actors, might act in unknowing concert to solve a particular problem.


Posted in: Potpourri

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1 Comment so far

  1. …no third solution » Blog Archive » Fire Protection as a Public Good April 25, 2007 7:44 pm

    [...] securing the necessary funds to operate the programs that provide them. I previously examined the Lighthouse Problem, after coming across an interview on the subject with Ronald Coase, at Reason a while back. [...]

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